Category Archive

Scott Sumner notes the rapid fall of dictators around the globe and asks

And of course the larger-than-life dictators (Saddam, Gaddafi) are gradually being replaced by bland technocrats. It looks like history will end at some point during the 21st century. So what comes next? Didn’t Fukuyama say something about using technology to change human nature? Will that be the next phase of humanity’s reckless journey into the unknown? I await your answers in the comment section.

Just to restate old points, I think there is a reasonable chance that we are close to the end of humanity, by which I mean this strand of earth borne sentient life. That includes any possible artificial intelligence decedents we might have or radical changes to the biology of “humans.”

That is, to be clear, I believe there is a fair chance this entire project is coming to a close.

On the other hand, if it doesn’t come to a close I have serious doubts that the future will be Democratic-Republicanism. It just doesn’t make sense in a Malthusian state and – should we continue – it is a Malthusian state to which we are surely headed.

I wanted to add some thoughts to Niklas’s post on the liberaltarian bargain of getting rid of corporate taxes in exchange for a carbon tax and a financial services tax. There are a couple of additional costs and benefits to consider here.

First, on one level this is the opposite of industrial policy. The U.S. has a demonstrated competitive advantage in financial services, and taxing that may cause many of those firms to go overseas. I know a lot of critics of the finance sector like to show charts about how large their profits have gotten over the year as evidence that it needs to get smaller, but I have never seen those numbers broken out by profits on domestic vs international customers and activities. I would bet that much of the banking sector growth has involved a growing dominance of the Wall Street as an international financial hub, and so those gigantic profits won’t somehow be magically transferred to other industries, but will instead simply go abroad. But maybe that’s a good thing, I don’t know.

Now, on the benefit side. I find myself increasingly thinking like Will Wilkinson that taxes which we usually consider value neutral like income taxes and corporate taxes are not value neutral, but are taxes on labor effort and business activity. And so we should consider if we have to discourage some activities, which ones do we want to discourage. Pollution is certainly better to discourage than business activity, and maybe financial services are too, I don’t know.

Another potential benefits depends on how elastic businesses location decisions are with respect to these taxes. Will lower corporate income taxes cause a large number of corporations to relocate to the U.S.? If so, then perhaps this can be a cudgel with which to encourage international adoption of the carbon tax and financial service tax. This is important because the effectiveness of both is largely dependent on international adoption. Other countries experiencing a large exodus of corporations to America may have little choice but to abolish their own corporate taxes, and thus may need to switch to carbon and financial service taxes to replace the lost revenue. If international adoption is a goal then we should think about choosing a bundle of taxes that will cause the largest economic drain from other countries unless they choose the same taxes. Of course, given the current potential for years of sluggish worldwide economic growth, these also need to be taxes that if we all adopted them would encourage growth, which means no protectionism. This proposed tax swap seems like the best option here.

Another benefit is that this will effectively remove the tax deductibility of interest payments for businesses. (It has been awhile since I’ve taken corporate finance, so I might be mistaken here). The incentives created by this policy lead businesses to take on a greater level of debt, and while I have not seen it discussed much, it seems like not having that policy would have meant businesses were less vulnerable to the credit crunch. Here is Interfluidity on the wisdom of getting rid of this policy:

Eliminate the tax deductibility of interest payments by businesses. Debt financing externalizes the risks of business activity and magnifies social costs, while equity financing concentrates risk among stockholders who signed up to bear it. Yet under current rules, taxpayers literally pay firms to get rid of stockholders and take on ever more debt.

If I am correct that getting rid of corporate taxes would eliminate this problem, than that seems like a huge benefit.

In all there is much to consider with this proposal, and the potential upsides are really huge. I can’t express how much I would love the fact that, as Kevin Drum points out, it would “remove forever Congress’s ability to provide quiet subsidies and corporate welfare handouts for their buddies”. Nevertheless, it is a dramatic proposal in terms of its scope and impact, and I hope to see it fleshed out more in the blogosp-… wait, what am I saying? The un-populism of this idea ensures it will never be enacted, so it doesn’t really matter anyway.

Will Wilkinson provides a nice Gapminder chart analyzing the relationship between per-capita GDP and life expectancy:

[Click image to enlarge]

Scott Sumner has some comments relating to a vague allusion to “culture”…but I want to be more specific:

Trust.

Trust is positively correlated with wealth, and happiness.[1] Denmark (a wealthy country), for instance, is the “happiest” place in the world (if you believe in happiness measures)…and not surprisingly, also has high levels of societal trust. Trust is also positively correlated with better institutions, including freer markets. Indeed, if everyone was highly skeptical of eachother, it is unlikely that a highly-functioning market would be able to evolve. Trust is also correlated with high levles of robust social norms, and the rule of law. Frances Wooley of Worthwhile Canadian Initiative has a piece on evolutionary theories of markets — which relies heavily on the development of trust between people.

Look at the countries in the lower-left quadrant of the chart. Most are from Africa, and all are relatively poor. But what else do they have in common? A rampant lack of trust between people. This lack of trust prohibits functional institutions from forming (both public and private).

Rich countries, of course, dominate the upper-right quadrant…having achieved very high levels of both income and life expectancy…and the cause? High levels of societal trust, which is the seed that causes wealth-generating institutions to arise…which in turn, increases health outcomes (as wealthier people can eat better, have more leisure and less physical and mental stress, and have access to better health care).

Countries in southeast Asia are also traditionally very “trusting” societies, even though some are poor…they also rank high-ish on the life expectancy side.

The Vatican is claiming that the Pope is the target of “hate” campaign.

VATICAN CITY – The Vatican heatedly defended Pope Benedict XVI on Tuesday, claiming accusations that he helped cover up the actions of pedophile priests are part of an anti-Catholic "hate" campaign targeting the pope for his opposition to abortion and same-sex marriage.

Vatican Radio broadcast comments by two senior cardinals explaining "the motive for these attacks" on the pope and the Vatican newspaper chipped in with spirited comments from another top cardinal.

"The pope defends life and the family, based on marriage between a man and a woman, in a world in which powerful lobbies would like to impose a completely different" agenda, Spanish Cardinal Julian Herranz, head of the disciplinary commission for Holy See officials, said on the radio.

When your critics are all mean spirited and have hidden agendas then cognitive dissonance within the organization is at its maximum and sustainably at its minimum. This may not be the end of the Catholic Church but I do suspect that the Church’s days as a Western Institution are numbered.

I’m not even going to try to enumerate all the inaccuracies here. Were credit default swaps really pivotal in the U.S. crisis? They certainly brought down AIG, and a couple of smaller monolines. And they made synthetic CDOs possible — without them, the “unfunded super-seniors” which did so much damage to many huge banks could never have existed. But they weren’t pivotal in the sense that absent CDS, the crisis wouldn’t have happened.

But we’ll give the NYT the “pivotal role” bit just because it’s simply untrue that credit default swaps “are emerging as one of the most powerful and mysterious forces in the crisis shaking Europe”. (Even assuming there is a crisis shaking Europe.) In what way, exactly, are CDS emerging as particular powerful in the latest Eurocrisis? CDS volumes on Greek debt are a fraction of the total amount of debt outstanding, and certainly no sovereign has written huge amounts of credit protection, thereby racking up enormous contingent liabilities, in the way that AIG did. In fact, European sovereigns aren’t players in the CDS market at all.

You see this sort of folk mythology among market watchers very frequently. They note that there are financial instruments which convey negative information about the soundness of the underlying institution. Furthermore, they quickly realize that just before institutions fail, there is often quite a lot of activity in those sorts of financial instruments. Therefore, if you could only eliminate the instruments, you could also eliminate the failures!

I don’t know enough about Greece’s situation to say whether or not CDS played a pivotal role but it is certainly theoretically possible. That is, one need not be quite as dull as Felix and Megan suggest, in order to believe that financial instruments could break a country.

I suspect and Felix seems to confirm that the market for CDS on Greek debt was orders of magnitude smaller than the market for the debt itself. Its therefore far more vulnerable to manipulation whether purposeful or accidental.

Buying large quantities of over-the-counter protection on Greek debt could cause discontinuous jumps in the price. Because the CDS is over-the-counter we would not expect the market to move in constant equilibrium but in a jerky fashion as buyers and sellers discovered one another.

Nonetheless, CDS on debt carries a lot of information. The holders of sovereign debt are typically looking for one of the securest investments in that currency. The mechanics of this are much more complex for a currency union like the Eurozone. Nonetheless, It seems reasonable that a significant portion of Greek debt purchases are not interested in doing detailed analysis on the Greece’s credit worthiness.

A spike in the CDS on Greek debt means that some set of parties who are interested in the creditworthiness of Greek debt have contracted on the assumption that the creditworthiness is getting worse.

That’s enough to encourage one to stick his Euro’s elsewhere and importantly its enough for some to believe that others will want to stick there Euro’s elsewhere. Such a move would lead to higher interest rates for Greece and hence an even rougher time paying back its debt. Hence, if I think all of this might happen, it becomes in my interest to get out.

This is the key difference between debt and equity on the functioning of an enterprise. If someone raids my equity that might not be good for my shareholders but generally speaking it doesn’t curtail my ability to do the things I want to do.

If someone raids my debt, however, that leads to a chain of worry about who will be the last person holding my debt and in turn makes it far more difficult to issue or turn over debt. This in turn can break me. So, running a stock and running CDS are totally different beasts.

Now, like I said, I really don’t know or claim to know a lot about Greece’s situation. I am only arguing that the notion that “the CDS did it” is not crazy from an enterprises point of view.

The last few weeks and months have been an intellectual roller coaster. I have discovered that much the academic training and thinking I have had and done up until now was a waste. [Caught up in the moment. This was clearly over the top. Lets just say, sub-optimal]

I had thought that by picking economics, I was picking the most important science. This is the science of choice. This is about evaluating what we do with our lives. Every science, every discipline, even the maintenance of a state capable of producing science depends on political economy.

Inside economics I thought I was picking the most important area – poverty and education. Well, in truth I thought the most important area was growth. In particular, how to get the third world growing. But, I was choosing my subfield when China and India were surging. I thought that the problem of third world growth was for practical purposes, likely solved. China and India would become so wealthy that together with Europe we could lift up Africa by brute force if necessary. The global growth future was bright.

So I thought, the problem of the 21st century will be what to do about individuals who are not getting all they could out of the modern global economy. What factors make individual poverty likely? What factors lead to such high poverty clusters? How do we increase individual productivity?

Now I see I was wrong. All of this assumes that we will continue in the same economic paradigm that we have for last 250 years or so. I see that this is much less likely than I would have assumed.

It seems likely that we are on the verge of a new economic paradigm; one defined by much more rapid technological expansion. The new problem is not making sure everyone is plugged in to technology but making sure that the power of the technology itself does not overwhelm us and destroy us.

I know this sounds a bit crazy and if someone had just said it to me like this I would have be inclined to slough it off as well. However, having spent a significant amount of time reading people who have clearly done their homework I am convinced.

So apparently I have been missing some of the most interesting arguments on Earth.(1) Basically, those made by Nick Bostrom, who I had not heard of a few hours ago. I am more than a little pissed about this but lets leave that alone.

Bostrom argues that the there are three possibilities.

1) Most human like civilizations will never reach the point where they can simulate reality

2) Most civilizations who do reach that stage will not want to create simulations

When I first heard a sketch of the argument in passing, I heard it phrased that (3) was likely. My response was what about (2)!

However, after having read Nick Bostrom’s paper (2) seems unlikely to me.

Why such a quick turn around?

Well, if a civilization becomes so advanced that it can create simulations then it is highly unlikely that it has not thought of the simulation argument. If it has thought of the simulation argument then, presuming the people are anything like us, they will want create the simulations as a test of the simulation argument.

That is, the desire to test (1) makes (2) unlikely.

Now how likely is that such people will want to test (1)?

This is admittedly very rough but it seems unlikely to me because such a civilization has already progressed to the level of being able to create a simulation. This means that they have extensive knowledge of the workings of the universe. Currently, I cannot imagine how this could be done without some interest in the scientific process. That is, the desire to test hypotheses.

Now, of course this is a statement about my imagination, not reality. However, it still seems that my subjective estimate of the probability of (2) should be low unless I encounter some evidence that makes it seem more feasible that a sufficiently advanced civilization will not want to test (1).

So as of right now it seems that either (1) or (3) is most likely.

(1) Of course this comes with caveat, that I now know of. Since it is obviously, possible, indeed likely, that I am missing out on even more interesting arguments. Do not hesitate to post them if you know them.

The challenges for private oil companies to increase oil production are pretty daunting.

ExxonMobil (XOM) has been producing a little over 2.4 million barrels of oil a day for the last year and a half, its lowest rate of production over the last decade.

Its becoming increasingly clear that oil production is stabilizing. I would have expected a more traditional Hubert Peak but technological changes seem to suggest that

A) Oil production is slowing down slightly sooner than I would have thought.

B) Production is unlikely to decline rapidly but will in no way keep up with growing demand.

Moving forward, these facts must be central to our national policy. As I believe is clear to everyone by now, rapidly increasing prices of oil shift the balance of international power in ways that are not favorable to the United States.

Even if there is massive advancement in alternative fuel technology, what that likely does is slow the growth of oil prices. If alternative fuel is viable because oil is expensive then alternative fuels cannot make oil inexpensive.

We have a vital national interest is subsidizing the move away from oil. Not to incubate new technologies or simply insulate ourselves from shock, but to drive down the international price. To make oil a less valuable natural resource.

Everyone” now agrees that the surge was a “success” because it helped us avoid “defeat” and David Petraeus is a “brilliant general” because, ultimately, a lot of foreign policy is basically oriented around making people feel good about the hegemonic post-Cold War American military project. In late-2006, Iraq was a feel-bad scenario for Americans whereas by the end of 2008 it had become a feel-good scenario, a fun story of adaptation to circumstances and how gritty determination led to triumph over adversity. But to me it mostly seems like a demonstration of how detached our conversation of about defense policy is from anything concrete.

That the core lessons of diplomacy and international relations seem to be missed by even the most senior political officials is deeply distressing. I am heartened that the educated public seems to understand the importance of controlling weapons of mass destruction.

I am disheartened that they seem to have no other sense of national interest. War has become a gigantic sporting event in which the primary motivation is “victory.” What makes it particularly bitter is that they use the term Machiavellian as a slur, when Machiavelli would have been clearly opposed to this type of senseless bloodletting.

If Realists support foreign policy because it serves the interests of the state, at least it serves some interest.

Matt Yglesias argues that Hitler was massively irrational not to keep his word and not invade Poland.

Is the conservative view that, in general, when you offer foreign countries a deal that they rationally ought to accept they will, as a general matter, usually back out of the deal even though doing so will have disastrous consequences for them? That can’t be right. At the end of the day, the reason analogies to World War II strike people so vividly is that they were so unusual. You can’t base your everyday decision-making on an extreme historical outlier.

First, just because you lose a gamble doesn’t mean its wasn’t worth taking.

Second, I think the conservative point is that you can’t trust dictators to be rational. They are crazy by nature and must be defeated.

I don’t have a lot to add to Ryan’s take on Europe vs. America. However, I will say the tastes which determine whether or not you like Europe is whether or not you like people – lots of people.

European middle class life seem to be set up in ways that maximize your contact with other people. From cafes to public transportation to the economic reversal of suburbs and the urban core the society expects that you will be okay with being intermingling.

To a large extent I think ethnic anxiety is what keeps Americans from feeling as comfortable in those situations. However, a less other people focused America is more appealing to introverts. The US is in many ways a dork paradise.

Stephen Walt’s piece at Foreign Policy leads me to rethink my support for a heavy US commitment in Afghanistan.

. . . it is hardly obvious that Afghan territory provides an ideal "safe haven" for mounting attacks on the United States. The 9/11 plot was organized out of Hamburg, not Kabul or Kandahar, but nobody is proposing that we send troops to Germany to make sure there aren’t "safe havens" operating there. In fact, if al Qaeda has to hide out somewhere, I’d rather they were in a remote, impoverished, land-locked and isolated area from which it is hard to do almost anything. . .

. . . one might also take comfort from the Soviet experience. When the Soviet Union withdrew from Afghanistan in 1989, the mujaheddin didn’t "follow them home." Were the United States to withdraw from Aghanistan and the Taliban to regain power (or end up sharing power, which is more likely), going after the United States won’t even be on their "to do" list. . . .

For a realist, the "safe haven" argument is the only possible rationale for a large military commitment in Afghanistan. But the case is actually quite dubious, and somebody in the administration really ought to take a hard look at it.

But within orthodox Shi’a theology, [the Ayatollahs] are not supposed to have guardianship over whole countries. The idea that they should was an innovation of Ayatollah Khomeini’s, and in theology, innovation is generally not seen as a good

In a series of posts Will Wilkinson worries that we’re excited about the Iranian uprising for all the wrong reasons.

Is that what we get if the Mousavi-Rafsanjani axis comes to power? A more liberal and democratic Iran? I honestly don’t know, and I don’t think many people do. I do know that these guys are deeply embedded in the larger status quo power structure, have had power before, and their records don’t look so good. They may well represent improvement, but I don’t honestly know that. As far as I know, the outpouring of desire for change that we see so clearly on YouTube is being exploited by one faction of the Iranian ruling class to depose another.

Anyone who believed the election of Mousavi was going to signal a significant change in Iran was, I believe, kidding themselves. I supported the Mousavi campaign because the enemy of my enemy is my friend. Or, more accurately and convolutedly, the enemy of the foil of my rival is my friend. That is, Ahmadinejad provided a convenient target for those who wanted to escalate war with Iran.

He was obviously a bit off his rocker, though I think much of it is an act. More importantly, however, he maintained popular support with jingoistic rhetoric about the United States and Israel. This in turn provided ammunition for those in the US who maintain support with jingoistic rhetoric regarding Iran. This bilateral escalation in nationalism seemed to be exactly the kind of thing that had gone horribly, horribly wrong before.

Since the election things have changed. The mass protests Mousavi has inspired have come to take on a life of their own and while it is difficult to see where all of this is headed, real change is now a possibility. I don’t mean a complete replacement of the Islamic Republic with some form of liberal democracy, but a serious moderation. The powers of the elected officials may be expanded and the Supreme Leader subjected to more oversight by the Assembly of Experts. These are steps in the right direction.

We should not be democratic fundamentalists and insist that a universal suffrage, completely open and free election is the only thing worth having. Let us not forget that 45 years ago the United States did not have universal suffrage. There were many things about the United States before integration that were brutal and repressive but it was a great democracy nonetheless.

There is widespread grassroots concern about the future of English as the language of America. I have never been particularly worried and this scene from Iran is why:

Those are brandished by the officers of an avowedly anti-British, anti-American regime; and yes they are printed in English. These are streets signs in the same country.

Note that not only is English not a native or official language of Iran, but the alphabet is not even Latin. Yet, the street names are co-listed in English.

English is not the language of the US or even Great Britain. English is the language of the world. Barring worldwide economic disaster, by the year 2075 English will be spoken on the street in every city, in every country in the world. Economically speaking there are large network externalities to using a common language. These externalities suggest that in equilibrium there will be only one language. The road signs suggest that that language will be English.

But what is happening in Iran looks like an incipient revolution. There are people in the streets shouting “Death to the Dictator,” and “Freedom, Freedom.” This cannot be good news for a regime that literally controls the news. This is not a bunch of semi-professional protestors bused in from Berkeley. This is an overnight massing of people in protest of their newly elected government. These are people openly defying the decree of the Supreme Leader. These are people who allegedly are asking the police to join them. No, they are not calling the police “Pigs” or raging against the machine. They are asking the machine to march with them. They are claiming legitimacy. They are claiming the right to power.

Yet, this morning the Times ran a piece arguing that Ahmadinejad is consolidating power – that the ruling elite are even more united. Well, Mousavi is a member of the ruling elite and he has 100,000 people in the street chanting treasonous slogans!

No government can govern without at least the tacit consent of the people. That consent can be won through persuasion or through force. But, when the people will not consent, you have no government. When the people refuse to yield to the law, you have no government. When the people refuse to leave the streets, to go to work or to school, you have no government. You have a revolution.

To some I extent I think the shortage of coverage on Iran may stem from widespread under-appreciation of the intricacies of Iran’s political sphere. Even NPR seems to suggest that Supreme Leader Ali Khamenei is dictator of Iran.

The decision comes after Mousavi wrote a letter appealing to the Guardian Council and met Sunday with Khamenei, who holds almost limitless power over Iranian affairs. Such an election probe by the 12-member council is uncharted territory, and it is not immediately clear how it would proceed or how long it would take.

If that’s your view then the Iranian elections were never anything more than a farce. That view, however, does not seem to be supported by the facts. By law Khamenei is elected by the Assembly of Experts who is in turn elected by the people. In practice it seems that Khamenei’s hold on power is contingent upon maintaining the good will of Iran’s clerical establishment.

To show just how convoluted Iranian politics seems to be, the head of the Assembly of Experts is Rafsanjani. Like Ahmadinejad’s chief opponent Mousavi, Rafsanjani is a reformist. He is also a former President himself and indeed lost the 2005 presidential elections to Ahmadinejad.

Thus Ahmadinejad’s suppression of Mousavi is contingent upon approval from the Supreme Leader. The Supreme Leader retains power only to the extent the Assembly of Experts, headed by Rafsanjani approves. Yet, Rafsanjani is a Mousavi ally. The circle of power feels like an eerie cross between a modern system of checks and balances and the inbred politics of Renaissance Italy. The fact that even NPR seems to mistake this for a simple dictatorship is disturbing.

Andrew Sullivan, Tehran Live and Tehran Bureau have been my major stops for Iranian election coverage. None of them, however, have really addressed the footage we’ve seen of Ahmadinejad’s massive rally on Sunday. Is this a genuine show of support? Why does it appear to eclipse in size and scope the pictures of protestors? Are we seeing only what we want to see from Tehran – a bunch of angry pro-Western rich kids who don’t represent the majority of the country?

That the Western blogosphere seems to be ignoring this is disheartening. If there was an easy explanation I find it hard to believe that it wouldn’t already have been offered.

We don’t know what will happen in Iran. Yet, it is possible that we are witnessing the beginnings of a modern democratic uprising in the Middle East. How this is not on every or indeed any major news channel is beyond me. On MSNBC there was a piece about abandoned kids, powerful but not overly timely. CNN had an anchor awkwardly reading tweets about hate in American, a little timelier. Fox News seemed to have a Glenn Beck rerun. This is hard to believe. Iran is the news of the day. Iran may be the news of the decade.

Not with a bang but with internal discontent. From Andrew Sullivan, both the Interior Ministry and a collection of Mullahs are express disapproval of the election.

On the Mullah’s

A committee of respected Ayatollahs (the spiritual fighters) have requested that the election be invalidated for the purpose of restoring the people’s trust in the Islamic Republic. We request the people to stay calm and not to provoke the government agents.

From the Interior Ministry

As dedicated employees of the Interior Ministry, with experience in management and supervision of several elections such as the elections of Khamenei, Rafsanjani and Khatami, we announce that we fear the 10th presidential elections were not healthy

Protestors in the street can be made to look like counter-revolutionaries, but jailing Mullahs and Ministry officials cannot be mistaken for anything but tyranny. These statements are huge. They are how governments topple.